FED discards its recession indicator….flat yield curve has no significance

The Wolfstreet website gives an interesting spin on the Fed’s minutes, which the Fed used to explain why the curve was an unreliable recession indicator; basically that the long end was being suppressed by the Fed’s balance sheet. It also blamed a “reduction in investors’ estimates of the longer run neutral rate” and “lower longer-term inflation expectations” although I fail to see these as being anything but normal components of bond yields. According to “some participants” these factors “might temper the reliability of the slope of the yield curve as an indicator of future economic activity” the minutes said. The “information content” of the curve may therefore be distorted, hence why they looked at the spread from 0 to 6 qtrs. Interpreting the two curves as recession indicators, the 2’s – 10’s curve (blue line) is showing a rising probability, while according to the new indicator, “the market is putting fairly low odds” on this scenario. As the article says, just as the 2’s10’s curve is approaching zero, the Fed is beginning the process of throwing that out as an indicator, suggesting a more hawkish central bank.

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